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Sun, 30 Sep 2007

The 700 MHz Spectrum Auction

Consequences of the electronic information revolution continue to sweep over us like ocean breakers on the seashore flooded in a never ebbing tide. And the pace is accelerating. From telegraph to telephone, then AM radio, television, FM radio, PCs with 56K modems, cell phones, the Internet, WiFi. It shows no sign of stopping. No sooner do we stagger to our feet, half drowned from the last wave of information overload that bowled us over face first into the sand, we are slammed down yet again.

No one escapes the pummeling, especially businesses that make their buck near these turbulent waters. Even those huge corporations who built their immense information technology castles on thick coastal piers big and strong can sometimes look down and see the sand being swept out from underneath. Yes, you can drive your piles deep down 1000 feet into the beach, but any IT castle is still ultimately built on sand. It can be undermined and swept away if the waves are big enough.

The 700 MHz spectrum auction is a Tsunami hitting the IT beachfront. Frequencies used by UHF channels 52 through 69, that's 698MHz to 806MHz, will be vacated once the transition from analog to digital television transmission takes place in February 2009. Some of 700 MHz has already been allocated public safety, or previously auctioned, but five chunks, including two 11 MHz wide slices, together called the "C-Block", will be auctioned in January.

This 22 MHz bit of spectrum may seem small in comparison to other bigger chunks at higher frequencies, like the 83 MHz slab used by WiFi at 2.4 GHz. However, as with any real estate, it's location, location, location. 700 MHz is a sweet location in the radio spectrum.

Generally speaking, the lower the frequency the less "light-like" radio signals behave; Light waves, which are at a ludicrously high frequency, travel in near perfectly straight rays. Low frequency radio waves are better at bending around corners and penetrating walls. Therefore, radio propagation at 700 MHz' anachronistically named "ultra high" frequency, has significant advantages relative to the "super high" frequencies in use by the current generation of wireless gadgets.

Historically, the next generation of wireless was always pushed to higher frequencies. Powerful owners of the incumbent technology did not want to give up their superior lower frequencies, and they strongly lobbied to keep them. In 1912, after the Titanic sank, the US Radio Act of 1912 restricted private "amateur" stations to 1.5 MHz and higher, reserving the lower frequencies for the powerful commercial players. The upper "short wave" frequencies were generally considered useless at the time. The amateur radio "hams" took up residence in the high frequency (HF) region and developed techniques that permitted worldwide communications. This was much to the amazement of commercial broadcasters, who never would have let HF slip through their fingers if they had realized it could be used for international broadcasting.

Then came Armstrong's invention of FM, a superior technology to AM, resulting in a bitter battle between Armstrong and commercial broadcasters led by RCA and David Sarnoff. The commercial broadcast lobby forced the spectrum allocation for FM to be at very high frequency (VHF) near 100 MHz, above RCA's TV allocation starting at 50 MHz. The VHF band was again considered to be useless spectrum. Indeed, this move nearly crushed FM. The FM technology didn't recover for decades, although today FM dominates in analog radio because of its superior noise performance.

It's important for me to note that these are events in the wireless history of the USA. There are parallels with what happened and will happen in other countries, but the details are considerably different overseas. Still, the general principle that the incumbents tend to hold onto lower frequencies does apply.

In the US, after FM radio there were a bunch of public safety and military allocations, then UHF television, each stacking up higher and higher in frequency, with none of the incumbents vacating their lower, more advantageous slots. When cell phones, WiFi, and PCS came on the scene, they again got stacked on top at 900 MHz, 1.2 GHz, 2.4 GHz, on and on, ever upward.

Till early 2006, when a new US law mandated a transition to digital television, beginning in 2009. Because digital television uses less spectrum than analog TV, commercial television broadcasters would lose the 700 MHz band of UHF TV spectrum. The liberated UHF slot would be put up for public auction. I'm not aware of a precedent for this. No matter how inefficient, no matter how obsolete, never before has a US wireless broadcast incumbent been booted out of a lower frequency to make way for new technology.

America wasn't discovered till it was discovered. Now it's happened. UHF channels 53-69 are to be auctioned. The incumbent has been booted out.

This change promises to redraw maps of the information coastline in ways that can be barely fathomed today. The folks that own property on yesterday's shoreline, and folks that expect their land may soon become beachfront acreage tomorrow, are bracing themselves for the event.

Bracing themselves, and maybe doing some frantic petitioning to Neptune and Davey Jones (not to mention "Uncle Charley") in hopes of influencing the odds in their own favor. The fact that their petitioning and bracing may be to the fatal disadvantage of their neighbors, is inconsequential. This is keepsies with the highest stakes – literally a life and death struggle. When Sarnoff beat Armstrong over FM after years of cutthroat battling, Armstrong dressed in a full coat and hat and jumped to his death from the thirteenth floor window of his New York City flat on 31 January 1954

Given the history of these epic battles, and the violent maneuvering associated with previous auctions, I knew the 700 MHz auction would be exciting. Still, I was momentarily taken aback when Google announced in July that it would bid $4.6 billion or more for a block of spectrum – only if the FCC agreed to its demands for open access. This stunning development turned heads nationwide. It made the evening news. Usually, just wireless techies like me would know about spectrum auctions, but with this action lots of ordinary people sat up and took notice. What in the world was Google saying? They would bid at least $4,600,000,000.00 for a license on the condition that the spectrum could remain accessible to all, and must not be restricted to just certain applications or just certain devices or just certain services.

To the conservative Republican fundamentalist private-property-think of late 20th century meatspace business mind, such purchase conditions were incomprehensible. What could Google be thinking? Pay $4.6B for something they don't even get to keep!? With its bid proposal, Google asked the FCC to regulate a portion of the future 700 MHz as a fully open market resource. The spectrum must remain available, by some mechanism, to any person, application, device, or network that wants it. The winning bidder couldn't keep it to themselves.

Under such a scheme of open access regulation, Google would happily pay Uncle Sam billions. On the other hand, if the band was to be regulated as a "closed" resource, that the buyer must keep private, then Google would probably pass.

As crazy as they sound, Google's conditions weren't completely out of left field. In the auction announcement, the FCC says quite explicitly:

With respect to the C Block, the Commission will offer alternative licenses without the open platform conditions and based on different geographic areas and spectrum bandwidth.
So they were already thinking in the direction of flexibility. But no open platforms. The FCC was thinking a little bit open – like a pond surrounded by ritzy homes in a Pocono development allows open access to the homeowners as long as they use the boats for rent at the clubhouse – not wide open like the Pacific Ocean is traveled by vessels of every description from every seafaring country.

Yes, Google's reasoning may seem crazy at first. Why would anybody pay for something they couldn't keep to themselves? Private property and controlling the means of production is the cornerstone of any right thinking capitalist's business plan. Is Google promoting Communism? Altruism? Is this a ploy for corporate welfare?

Not a chance. Google is willing to spend $4.6B to see the C block of 700 MHz remain open because they believe such a regulation would foster a free market that would return their investment back to them, with phenomenal gain no matter who the winning bidder might be. If they win, fine. If they lose, fine! Either case, they get a market in which Google would flourish.

In today's political climate it's popular to talk about private property, deregulation and laissez faire and how this fosters economic growth and efficiency. Open access and 'net neutrality' is often painted as anti-competitive, communistic, big government regulation.

Nonsense.

It's considerably less popular to observe the equally true yet seemingly paradoxical fact that regulation makes free markets possible. We wouldn't have the free markets we have without the regulations we have. In some sense, a central purpose of government is to set up rules that promote and protect orderly, civilized markets.

The way Google sees it, the FCC can auction the 700 MHz C-block with open-access regulations that makes it a new, free market for wireless applications. That's a good thing.

Some may see Google's motivation as relating narrowly to its advertising based business model, as compared to business models like subscription systems that require closed access. Google just figures they will sell more ads with open access than with closed access. This is part of the truth. They will sell more ads. But everybody with a cyberspace business will sell more of whatever they are selling. Subscription services can flourish too.

Think about how resource openness based on regulations fosters other businesses. Consider private toll roads, for example. They are run privately, but are regulated to be open in the sense that anyone can use them. The market benefit of these roads to is immense. If toll roads were restricted – say only FedEx and UPS could use them, or they only could be used by certain kinds of vehicles, or vehicles running on certain fuels – it might be good temporarily for those allowed on, but the economy as a whole would be hurt.

In fact, open, unrestricted navigation on roads is so ingrained in our thinking that we can't imagine a successful economy without them. In the US, freedom to drive our cars anywhere we want is practically the definition of what we mean by the word "freedom".

But spectrum allocation is quite different. Almost since its infancy, the radio spectrum and the devices that use it were closed down and tightly regulated in every conceivable way. As a result, closed access to spectrum and closed devices that access it are just as ingrained in our minds. But just because we can't remember doing it any other way doesn't mean it's the only way or the best way. I've heard reasonable arguments that the whole concept of frequency allocation is now bankrupt, but the FCC shows no signs of being cut from the bloated federal bureaucracy.

This is how Google sees the 700 MHz C-block. They believe that the FCC can make this spectrum into a free access highway. It would usher in a whole new market that has never been seen before: a free market for wireless devices, applications, networks.

Imagine we lived in a country where vehicles and roads were tightly regulated. You were prohibited from using any road or vehicle unless you appeared before a commission and through a long process that took years gained approval to use a certain route "allocation". Only with the proper approvals, drive plan, etc, could you venture forth, but only to do what you were approved for, with the vehicle that was certified, on the route allocated to you. Carrying packages for third parties is prohibited. The regulations are so burdensome that only a select few can drive.

Now, also imagine you were a retailing company that managed to survive in such a country despite the burdensome transportation regulations. You have stores in every town serving a population that can't drive. To get your goods from your warehouses to your stores, you put together a worldwide team of kayakers to deliver packages – rivers being unregulated. United Paddler Service (UPS) in brown boats. You also get some deliveries by horseback. Horses and Kayaks are your "two pipes".

Finally, imagine that the government decides to auction access to some of the roads. The roads would remain closed, but the auction winner could use the road for an approved private purpose. You could bid on these roads. If you won, you could create and monopolize a "third pipe" for deliveries. It would help you expand your business into areas hard to reach by horse or kayak, and you would retain your dominance in local retailing.

But then you think: what would the world be like if the restrictions on roads were lifted. What would happen if anyone could drive anywhere? You suddenly realize that business would grow immensely at your retail stores. With people driving around freely, they would want to shop, eat, and be entertained all sorts of new places and in all sorts of new ways, far more than before. You see this as a priceless opportunity that your company in perfectly poised to take advantage of.

So you tell the government you will bid $4.6B for these roads, but only on the condition that they not be restricted to certain routes, vehicles, passengers, or cargo. If these are the terms, you can't lose.

My little parable is designed to illustrate that Google is not primarily interested in the 3rd pipe; they are interested in promoting a net-neutral Internet, and in that way fostering and protecting the free market in cyberspace. It's about creating a new, freer wireless market, that could lead to redoubled growth in information technology. Grass roots entrepreneurs would be empowered to try things they built in their garage. They would compete side by side with the big guys. The airwaves would no longer be tightly controlled by the FCC and dominated by a few giant corporations, stifling innovation as the incumbents use their government enforced monopoly position to maximize their own profits. Wireless would become more like the Internet, where the cost of entry is low and literally anybody can be successful.

Critics of Google that do understand their motives say this. OK, if you'll profit so much from open access at 700 MHz, just bid high, win, and then give the spectrum away under the terms you want.

Unfortunately, it doesn't quite work that way. Google can't give anything away with out the FCC's say so. When you get spectrum from the FCC, technically you don't own it. You get a license to use it for a specific use. There are hundreds of pages of regulations that apply to you even though it's supposedly your spectrum. Historically, the FCC has been very specific about acceptable use. Exceedingly specific. Not only do they regulate technical aspects of spectrum use, they regulate the content. Obscenity, for example, is one of their many concerns. So, the pundits that seem to think spectrum is like private property are wrong. (Similarly, people who think intellectual property is private property are wrong, but I digress.)

For Google to get the kind of open access 700 MHz allocation that they are seeking, the FCC has to agree to it. It isn't necessarily an option for Google to just buy it and do what they will with it – the freedom to offer open access doesn't exist unless the FCC regulates that freedom into existence.

That said, there is a sense in which the anti-Google pundits are correct. The open access provisions will lower the value that accrues specifically to the auction winner. Under open access, the winner is merely steward of 700 MHz, not king. This will inevitably lower the winning bid. If open access was not preset in the auction terms, but permitted as an option to the winner, anyone bidding with the intent to be steward would be forced to overpay for what they will get in order to outbid those wanting to be king.

Of course, if my arguments are true and there are vast riches to be made if the band goes open access. Then the steward out bidding those who seek to be king is still worthwhile. And it may happen.

Another question I've heard asked is this: why doesn't the FCC just open up 700 MHz like the Part 15 bands are open to unlicensed operation? This is a good question, although it also contains the same misconception that leads people to suggest that Google could just give away the 700 MHz band if they won the auction. The Part 15 bands are unlicensed, yes, but every device that uses them legally must go through a FCC certification process. Unlicensed doesn't mean unregulated. While in concept the FCC could allow unlicensed 700 MHz users, this is totally separate from what the rules will be in that band and who will enforce them.

I tend to feel that any public resource with open access needs some sort of steward, just like a toll road has crews for snow removal, pavement repair, etc... If the open access provisions are adopted for 700 MHz, the auction winner will be this steward. It's an important role, but maybe not the sort of role that the Verizon's of the world are interested in bidding for.

If you weren't paying attention till the $4.6B pre-bid, maybe Google's announcement seemed to be the opening move of this game. Actually, this death match had begun much earlier. The Google move was just the next logical thrust in response to a parry by the FCC.

Just a few weeks earlier than Google's $4.6B pre-bid, the FCC proposed a new rule that seemed to say that radios containing "open-source elements" would be discouraged with a slower path to market, or be banned altogether. With a 20th century view of the role of the FCC, such an attitude toward open source "software defined radio" makes perfect sense. The FCC was charged with keeping order in the scarce resource that is the radio frequency spectrum. No radio goes to market in the USA without their blessing. A radio who's operation is defined in a way that the FCC would be unable to bless could certainly not be permitted.

The only problem with this totally reasonable 20th century attitude is that the year is 2007. Radios have come a long way since Marconi. The core concept of spectrum and frequency allocation, once the only practical means for keeping two different radio links from interfering, is now merely one possibility. New techniques have been developed. For example, millions of cell phones that all run on the same frequency manage to work perfectly well. Some of those phones are called iPhones – a device that was first introduced by Apple just a week earlier.

When the FCC proposed to stall or ban software radios, innovators in the leading edge of the software radio industry reacted in horror. What were they saying? Were they saying that the biggest advances in wireless technology of the last few decades would be locked up in a regulatory cage? Yet another fertile area for grass roots entrepreneurial development would become a "members-only" exclusive club?

I hope not. I like living in the USA, and as an engineer and businessman who makes his living from communication technology, I'd like our country to be a prime market for what I have to sell. If open-source software radio is banned in the US, this innovative technology will just move overseas and become grey-market in the USA. I don't see that as good for anybody over here; not in the long run.

The notice regarding software radio came before the Google announcement. After the Google announcement, it was the FCC's turn again, and they agreed to two of Google's four conditions. The ones they agreed to: (1) open applications, the right of consumers to download and utilize any software applications or content they desire; and (2) open devices, the right of consumers to utilize their hand held communications device with whatever wireless network they prefer.

The FCC did not agree to mandate "open services", which would allow resellers to acquire wireless services from a licensee on a wholesale basis. Nor would it mandate open networks, which would allow ISP's to interconnect with the wireless network.

Obviously Google was very happy about this. I was too. Given the proposed FCC rule banning software radio just a few weeks earlier, I was relieved to see open applications and devices given the thumbs up. Better, would have been if the FCC had given all four provisions the thumbs up. Still, I was happy.

But not everybody was happy. Verizon and AT&T, for example, were furious. Their telecommunications business depend on closed access regulations. In landline telco their monopoly was first broken when AT&T was chopped up, then again with the emergence of VOIP. Fortunately, despite the competition from Vonage and Skype, "the phone companies" still have nice closed wireless networks to keep their old business model pumping. It would be horrifying to them if that also was lost.

And maybe it would be lost if the FCC should allow 700 MHz to be an open access band. It would bring true competition into the wireless market for the first time. Worse yet, the competition would occur in a band that had superior propagation performance. If that happened, it would suck to be a company like Verizon. So they do what any right thinking US corporation would do when faced with a threat of that magnitude. They sued.

A few weeks ago Verizon filed a lawsuit in federal appeals court claiming that the 700 MHz auction terms (particularly with regard to open access) "violates the US Constitution, violates the Administrative Procedures Act, and is arbitrary, capricious, unsupported by the substantial evidence and otherwise contrary to law."

Wow! I'm not a lawyer, but that sure does sound serious.

It also sounds like rhetoric we have heard before with respect to net neutrality. Fundamentally, Verizon is a meatspace business and businesses in the meat world feel that what flows through their wires or their spectrum does so at their pleasure. To them, the Internet doesn't exist as a sovereign entity with its own citizens, companies, free trade, customs, and rights. The Internet is not a place independent of our meatspace world. Rather, they see the Internet as an information service they sell subscriptions to. The Internet is completely and wholly dependent on the service providers that keep the packets flowing, and as such is powerless to make demands on them one way or the other.

That's how Verizon thinks and how many opponents of Net Neutrality think. But if you think of the Internet as an independent virtual place, with citizens, companies, free trade, customs, and rights, then messing with the packets is tantamount to an act of war – just like interfering with shipping in international waters can be an act of war. The packets do not flow merely at the pleasure of the owner of the wire. There are other stakeholders. Virtual stakeholders, but stakeholders none the less.

Admittedly, the power of the cyberspace entities is limited, but they do have power. Their dependence on the meat world is near total, but not quite total. And in both aspects they are growing rapidly. If it comes to pass that the FCC auctions 700 MHz with even two open access provisions, it will be an immense benefit to the growing sovereignty of cyberspace. This sovereignty will foster a new and stable cyberspace marketplace that will benefit everybody in that world, and not a few people in the meatspace world as well. Yes, some meatspace oxen like Verizon will be gored; cry me a river.

Posted Sep 30, 2007 at 02:57 UTC, 4056 words,  [/danPermalink

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